Three superannuation reforms that would promote fairness and equity

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John Eldridge does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.

The taxation of superannuation has been the cause of much consternation. Much of the difficulty is the result of the slow drift of superannuation from the moorings of its original purpose.

In introducing the superannuation guarantee in 1992, the Keating government was pursuing an ideal firmly centred on the ordinary person of ordinary means. The hope was to extend superannuation to the entire workforce as a means of ensuring working people were not wholly dependent on the state in funding their retirement.

Over time though, this vision has been lost. A succession of reforms have seen superannuation gradually assume the function of a tax shelter for the wealthy. The concessions available under the present framework are overwhelmingly skewed towards those who are perfectly capable of funding their retirements without government assistance of any kind.

These three reforms would promote fairness and equity in the taxation of superannuation.

Progressively tax fund earnings

Fund earnings are, in general, taxed at a rate of 15% while the fund is accumulating, and are tax-free once the fund is being used to provide a pension. The benefit of this is relatively modest for those to whom a low marginal income tax rate applies.

But for those who have large funds and to whom the top income tax rate applies, the value of this concession is extraordinary. By concentrating assets within super, wealthy individuals are able to avoid the high tax rates which would apply to those assets’ earnings if they were held in the individuals’ own names.

The burgeoning self-managed-super-fund advisory industry is testament to the zeal with which high-net-worth individuals are pursuing the tax advantages which the present system affords.

Superannuation was never intended to operate as a tax shelter for the earnings of multi-million-dollar equity portfolios. There is a strong case for introducing progressive taxation of fund earnings to prevent this misuse of super.

Lower the cap on concessional contributions

The general concessional contributions cap presently sits at $30,000. This means that individuals can contribute up to $30,000 to their super from their pre-tax income in a financial year (including any employer compulsory contributions) and pay a concessional tax rate (usually 15%).

There is a very strong case - put by the Grattan Institute’s John Daley in April - that this general concessional cap is far too high. The present figure represents a huge proportion of the annual income of the average Australian. Most workers are simply unable to take advantage of the full extent of the tax concessions available.

The lion’s share of the benefits are therefore captured by those with large incomes who can afford to make voluntary super contributions by way of salary sacrifice. While it is sensible to encourage workers to make voluntary contributions to super, it must be recognised that the average Australian is simply unable to spare tens of thousands of dollars a year for this purpose.

Retain the low income super contribution

One of the peculiarities of the current system is that some low-income workers are actually made worse-off by the ‘concessional’ contribution tax rate.

Take, for example, a part-time cleaner who earns $15,000 per annum. This income falls below the tax-free threshold, and therefore attracts no income tax. But the compulsory employer contributions made on this worker’s behalf are still taxed at the standard concessional rate of 15%. The profoundly unfair result is that this worker’s super contributions are subject to a “concessional” rate which is actually higher than the tax rate applied to his or her ordinary earnings.

This is currently remedied by the existence of the Low Income Superannuation Contribution, which operates to reverse this unfair result for those who earn under $37,000 per annum. The motivations which underlie this policy are admirable. But the LISC is due to cease on 30 June 2017, and the government has not yet indicated an intention to extend its life or make it permanent. If the LISC is permitted to cease, the result will be a system which actively disadvantages the least well-off while directing substantial largesse to the wealthy. This would be an extraordinary outcome.

If the government is serious about superannuation reform, it should be looking closely at some of these. The opportunity of raising revenue while taking super back to its original purpose is too good to pass up.